Friday, January 11, 2008

An Overview of the Past 60 Daze...

Okay, here's the scoop in so far as I've been able to put together. Last May, Pay By Touch had lined up a $400 million dollar investment. However, as I recently found out, because of the mess created by the sub-prime mortgage industry, that financing fell apart in July. They began working frantically to raise more capital, but the small-cap industry was all but dead. As a result, they found themselves in a serious cash crunch. Pressures to raise money mounted, and unfortunately, these pressures caused some emotionally charged reactions in and around the board room.

To make a long story (soap opera?) short, the result was maybe some ill-advised governance decisions by then Chairman, John Rogers, including, but not limited to, the firing of former Western Union CEO, and PBT COO, Eula Adams, as well as Art Petrie, a director. Subsequently, John Morris, PBT's CEO, resigned in protest. One of PBT's investors, Plainfield Asset Management, stepped in and demanded that they be reinstated. When they were rebuked, they exercised a provision in their agreement with PBT that enabled them to seat their own board members. John Rogers attempted to block that move by filing an involuntary bankruptcy petition against Solidus Networks, invoking that he and some of his associates were owed money by Solidus.

The end result is that this "froze" the company and basically made it headless until a December 21st courtdate. From the standpoint of preventing Plainfield from naming the board of directors, it worked, but from the standpoint of public relations, it was nothing short of a disaster.

John Rogers paid a heavy price in the media and some trade rags. Some of the allegations made by the uninformed rumor mongers were not only based only on hearsay from contentious former employees blissful with Shendenfreud, but downright slanderous in nature. On the other hand, he did make some mistakes and he was in the spotlight, and when you're in the spotlight you both shine bright, whilst at the same time you have your dark-side illuminated. That's part of the power of anonymity.

Anyway, at the end of the day, when the smoke cleared, everybody worked everything out to the point where a new board of directors was named, and the company elected to go into voluntary Chapter 11 reorganization There have been several conference calls to shareholders, the content of which I cannot comment on, but suffice it to say that they have cut their burn rate significantly and have put up for sale, some of their non-core assets. These assets DO NOT include their biometric authentication and payment division, nor does it include their personalized marketing division (consisting of Capture Resource and S&H Solutions).

They remain firmly committed to both of those divisions as they have tremendous market value and profit potential. In fact, they have some very exciting news coming out of both of those divisions during the first quarter, including a significant rollout of their SmartShop personalized marketing program. They have also been talking to Shell Oil who, according to the conference call, is very committed to Pay By Touch. However, they are no longer pursuing money-draining divisions such as Healthcare, Government, Online and International (other than their Citibank connection, who remains committed to Pay By Touch) In addition, they are selling their Payment Solutions Division as well as ATMDirect.

Pay By Touch inherited a lot of employees with the acquisitions of several companies and their payroll was out of control, so they have trimmed some of their workforce. They intend to bring the core component workforce down between 200-250 employees up from a high of 850. From discussions I've had, they are convinced that they will come out of this cleaner, leaner and meaner.

So, what initially seemed like a disastrous blow, to a company everyone thought was a sure bet, now seems to be more analogous to a bump in the road. Although I'm not tickled about them getting rid of ATMDirect, it is what it is, and it certainly could have been exponentially worse. Here's an article that ran yesterday in Digital Transaction News:

A Pared-Down Pay By Touch Takes Bids for 'Non-Core' Units

(January 10, 2008)

Biometric-authentication and loyalty services technology provider Pay By Touch is in Chapter 11 reorganization, has cut costs drastically, and is shopping some of its subsidiaries, but the company’s former chief executive--who is now a member of the firm’s newly constituted board of directors--says Pay By Touch is solid at its core.

“This company is worth a lot of money,” director John Morris tells Digital Transactions News. “The business opportunity is phenomenal.” He adds that despite Pay By Touch’s governance troubles and bankruptcy in recent months, “there’s been virtually no erosion of the client base as a result of this activity.”

Solidus Networks Inc., which does business as San Francisco-based Pay By Touch, on Wednesday announced the new board and said it is selling what it calls non-core assets, and Morris tells Digital Transactions News at least some bids have already come in. The financially strapped company last month voluntarily filed for Chapter 11 reorganization in U.S. Bankruptcy Court in Los Angeles after some employees tried to bring it into bankruptcy involuntarily (Digital Transactions News, Dec. 27, 2007).

The new board represents a victory for Plainfield Asset Management LLC, which in a fight with Pay By Touch’s former chairman, chief executive, and controlling shareholder, John P. Rogers, went to Delaware Chancery Court late last year to seat its own directors. Plainfield, a hedge-fund firm with equity and debt investments in Pay By Touch, said the company was in default of its lending covenants, which gave Plainfield the right to seat its own board in such an occurrence. Rogers, who had fired independent board member Arthur Petrie and chief operating officer Eula Adams, fought the move, starting the legal fight in Delaware, when Solidus is incorporated. But rather than wait for a court determination, the two sides settled the governance issue last month, according to Morris. Plainfield declined comment.

Plainfield wanted to bring back the ousted members and keep Rogers on but only as a director, which is now how the board is composed. Members include Petrie, who is now the chairman; Adams, again chief operating officer; Morris, who court documents say resigned when Petrie and Adams were fired; chief financial officer Robert Sigler; and Rogers, who has no executive duties. (Rogers has filed for personal bankruptcy in the Los Angeles court.) The top executive remains corporate-turnaround specialist Thomas Lumsden of FTI Consulting Inc.’s San Francisco office, whom the Delaware court appointed in November on an interim basis and whose title is chief restructuring officer.

Morris says he is playing an advisory role as the restructuring gets into high gear. He says the company has cut up to three-fourths of its operating expenses, has adequate interim financing, the amount of which he can’t divulge, and is current in meeting payroll obligations. A news release Wednesday said staff has been pared, but the company didn’t disclose the number of layoffs. Pay By Touch also has hired investment banker Jefferies & Co. to find potential investors. “We’re trying to move forward very rapidly on this,” says Morris.

On the block are several so-called non-core subsidiaries operating under bankruptcy protection, including Paycheck Secure, ATM Direct, and Payment Solutions, the merchant processor that formerly operated as CardSystems Solutions Inc. Some observers were surprised that Paycheck Secure, which provides biometric-based paycheck-cashing services and came to Pay By Touch when the company bought rival BioPay LLC, is on the block. But Morris says Paycheck Secure serves convenience stores and other small businesses while Pay By Touch is focusing on larger retailers such as Shell Oil outlets and SuperValu Inc.’s Jewel/Osco supermarket-pharmacies. “We have not done that integration work” with Paycheck Secure, he says. “The core is viewed as being more around big, multilane retailers.”

Core subsidiaries not part of the bankruptcy filing include Loyalty Acquisition, which does business as Capture Resource, and S&H Marketing Services, which does business as S&H Greenpoints. As part of its effort to focus on biometric authentication, payments, and personalized marketing, Pay By Touch says it has suspended its efforts in health care, government, online, and new international businesses other than a project with Citibank in Singapore.

Morris is optimistic that buyers will be found soon for the subsidiaries, and he hints the entire company could be sold if a “strategic” buyer is found. “We’re beyond serious lookers, particularly on the subsidiaries,” he says. “We’ve received specific bids."